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Federal Reserve


Federal Reserve Regions

The Federal Reserve System (also known as the Federal Reserve or simply "The Fed") is the central bank of the United States. It was created by the United States Congress with the passage of the Federal Reserve Act in 1913.

The Federal Reserve System is composed of a central Board of Governors -- in Washington, D.C, and twelve regional Federal Reserve Banks located in major cities throughout the nation.

"Federal Reserve" was carefully selected name - "Federal" implying that this is a government organization. "Reserve" implying that the Federal Reserve notes (i.e., all United States currency) issued is backed by gold and/or silver. In fact, the Federal Reserve is a private corporation, authorized by Congress but owned by private member banks. Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything. The notes have no value for themselves, but for what they will buy.

Roles and Responsibilities

The main tasks of the Fed are:

History

The Federal Reserve System began operations in 1914 with the appointment of the Organization Committee by Woodrow Wilson. This committee was composed of Secretary of the Treasury William McAdoo, Secretary of Agriculture David Franklin Houston and Comptroller of the Currency John Skelton Williams.

The organization committee was chartered with selecting the locations of between eight and twelve decentralized Federal Reserve Banks. They decided upon twelve cities, and a centralized "Board of Governors" in Washington, DC:

Each of these cities came to be important financial districts due, in large part, to this selection.

Organization of the Federal Reserve

The Federal Reserve is comprised of a board of governors. The 7 members of the board are appointed by the President and confirmed by the Senate. The members are elected for a term of 14 years (with no re-appointment possible). The Federal Open Market Committee (FOMC) comprises the 7 members of the board of governors and 5 representatives from the Federal Reserve Banks.

Alan Greenspan is the current chairman.

Interest rates

The Fed is in charge of setting the federal funds interest rate. This is the rate that banks are forced to charge each other for overnight loans to each other. This in turn influences the Wall Street Journal prime rate which is usually 3 percent higher then the federal funds rate. This prime rate is the relative rate that most banks price their loans at.

The Fed usually lowers or raises its rates by 0.25% or 0.50%. The Economist, Merrill Lynch, Lehman Brothers, HSBC used to make predictions about how the rates will change.

Since 2001, The Fed has lowered its interest rates several times to fight recession : lower rates make credit cheaper and so enable more investment, whereas saving brings less money (see monetary policy for more explanation).

In November 2002, rates were cut to 1.75. Rates are below inflation level.

It is said that the Fed doesn't have much ammunition left, since rates are already below inflation and that 1.25 means that there no much room left for further cuts (in theory five times 0.25)

In March 2003, interest rates were at their lowest in 40 years.

On the 23rd of July 2003 a Federal Reserve committee cut the federal funds rate by one-quarter of a percentage point - to 1 percent.

The federal funds rate is also called the overnight rate because it is what banks charge one another for overnight loans. The last time it was lower was in July 1958, when the overnight rate averaged 0.68 percent. The Fed has cut the overnight rate 13 times since the beginning of 2001, when the rate was 6.5 percent.

The Fed and BCE

The Fed, in contrast with the European Central Bank (ECB or BCE), has two goals—keeping growth and fighting inflation—while the BCE has only to fight inflation.

Who Owns the Federal Reserve?

The Federal Reserve claims that nobody owns it – that it is an "independent entity within the government"
The Federal Reserve System is not “owned” by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects.

As the nation's central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. However, the Federal Reserve is subject to oversight by the Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government. Therefore, the Federal Reserve can be more accurately described as “independent within the government.”

The twelve regional Federal Reserve Banks, which were established by the Congress as the operating arms of the nation's central banking system, are organized much like private corporations—possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold or traded or pledged as security for a loan; dividends are, by law, limited to 6 percent per year. (see section 3)

However, congressional authorization not withstanding, the Federal Reserve is, in fact, largely a private corporation owned by its member banks.

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